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Edited transcript of this year’s “Next Black Swans” video: Right at this moment and probably for many months to come, we are passing through a unique vortex in time.
It’s unique because it involves three extreme megatrends that are, or soon could be, impacting every aspect of life in the United States: Real estate. Presidential elections. Jobs. Plus, your money.
And it’s especially unusual because it’s driven by powerful, unpredictable forces that are beyond our control — Black Swans that appear out of dark clouds … swoop down unexpectedly … and land in unexpected places …
Like the Black Swan that attacked the very heart of our nation on 9/11, with great loss in life and treasure, setting off a chain of events that have continued to ricochet through time:
The U.S. invasion of Iraq. The fall of Saddam Hussein. The rise of al-Qaeda in Iraq. The sudden emergence — and global spread — of the Islamic State.
One year ago, we also talked about another Black Swan event that struck at the very heart of our financial markets. It wasn’t September 11, 2001. It was September 15, 2008, the fateful day Lehman Brothers filed for Chapter 11, again setting off a chain of events that have continued to ricochet through time: America’s deepest recession since the 1930s. America’s largest bank failures and rescues of all time. And now, the largest Fed money-printing operations the world has ever seen.
One year ago, I also showed you that despite our problems here in the U.S., the instability abroad was worse. That’s also true today.
I showed you that ISIS was expanding across the Middle East and beyond. I explained to you how more countries around the world were getting dragged into international wars and conflicts. Also true today.
Plus, I illustrated how those conflicts were helping to drive foreign capital into U.S. assets, also continuing today. From the East to London … then across the Atlantic to New York … not to mention, flight capital flowing from Canada … and from Latin America.
All that continues. But now, we are moving into a new phase, a phase in which Black Swan conditions are beginning to appear more prominently right here in the United States.
How will that alter these global money flows? How will that be felt in our community? These are tough questions, and I’ll do my best to address them before we part today. For now, let me ask you a big question: What do you think will be next MAJOR Black Swan event?
Sorry, that’s a trick question. Because, by definition, if we could predict them, they would not be Black Swans to begin with.
No one can predict Black Swans. What we can do, however, is to analyze the set-ups for Black Swans. We can study the pre-conditions that give rise to Black Swans.
Let me give you just three prime examples, three major megatrends that are set-ups for future Black Swans.
Black Swans of the First Kind:
In the Financial Realm
I’m talking about a big bubble. Not a housing bubble or stock market bubble per se. But another kind of bubble — the money bubble, the big money printing by the U.S. Federal Reserve and, by other major central banks around the world.
Of course they don’t use money printing presses like they used to in the old days. They do it electronically. But it’s still the same process. The Fed and other central banks around the world create money out of thin air. They pump that money into the banking system. And then they pray the money will be put to good use.
Yes, I know what you’re thinking. You’re thinking “So what else is new? This is what they’ve always done, right?”
No, this is not what they’ve always done, and I’m going to prove it to you right now. I’m going to take you back in time to show you how they used to do it. I will show you how they do it now. And I will show you why it’s dangerous.
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We go back a half century — to the 1960s. The Cuban Missile Crisis and the real threat of a thermo-nuclear war. The assassination of JFK. The Vietnam War, with troop levels more than double the peaks in Iraq and Afghanistan combined.
Yet, despite all this, the U.S. Federal Reserve does not print money wildly. The Fed’s balance sheet, which reflects printed money, grows slowly and gradually.
Perhaps you could argue that, fundamentally, those Black Swan events of the 1960s are not really serious threats to the U.S. economy.
But the 1970s put that argument to rest: On August 15, 1971, President Richard Nixon walks into the Oval Office, sits down before national television cameras, and says …
“I have directed secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States.”
With those words, he demolishes the gold standard and shatters the postwar agreement that guarantees stable world currencies.
We see oil prices doubling and tripling; long gas lines and no gas for sale.
New York City sinks to the edge of outright bankruptcy. But still, the Federal Reserve does not print money wildly. Still, it grows its balance sheet slowly and gradually.
So you come up with a new argument. You say that all those Black Swan events are still not serious threats to the U.S. banking system, and maybe that’s why the Fed does nothing unusual.
But the next decade, the 1980s, puts that theory to shame: Between 1980 and 1991, we witness the failure of 1,200 savings and loans. We see the failure of 1,500 commercial banks, including Southeast Bank here in South Florida, not to mention the Bank of New England, and many, many others. We see the nation, shocked by images of state-wide bank shutdowns in Maryland and Rhode Island. But still, the Federal Reserve does not print money wildly. Still, it grows its balance sheet slowly and gradually. Ditto for the 1990s.
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Until, that is, the Y2K bug: Many people are afraid that, because of a glitch in computer programs, the banking system will collapse, the power grid will go down and the economy will come to a screeching halt.
And in the second half of 1999, the Fed Chairman himself begins to believe it. The result is this surge in money printing as you see here.
As it turns out, Y2K is a non-event. But then the Fed Chairman embarks on a second money printing binge in response to 9/11!
And those were just the warm-ups. In 2006, President Bush appoints a new Chairman of the Federal Reserve with the nickname “Helicopter Ben.” It’s Ben Bernanke, and he gets his nickname from his pet theory that, in times of crisis, the Fed should pour money onto the economy like hundred-dollar bills from helicopters.
Now comes the real deal. Now comes the Big Bang of the 21st Century, the granddaddy of financial Black Swans.
You know what that event is. It’s when Lehman Brothers fails. And then within a few short weeks, Bernanke embarks on the first outright money printing in the history of the U.S. dollar. It’s literally off the chart.
Just around this time, I meet causally with a former Chairman of the Federal Reserve, Paul Volcker. He and I happen to be at the same conference in Washington, D.C., sitting in the same lounge, talking about a dear mutual friend, and about all the government rescue operations. That’s when he says something very unusual and with no punches pulled,
“Mr. Weiss, when I was Chairman of the Fed, I never could have imagined, in my wildest dreams, that the government would ever do something like this.”
But that’s just the beginning! This time, even after the immediate crisis dissipates, Mr. Bernanke does NOT take that extra money back out of the banking system. He teleports us into a new world — a world in which billions turn into trillions, and a world in which all the books on monetary policy are dumped into the Potomac.
For starters, he gives us a new creative name — quantitative easing or QE … and prints even more money. Then when the first round of QE is not enough, he embarks on QE2. And when QE2 is still not enough, he and his successor, Janet Yellen, give us QE3, almost as big as QE1 and QE2 put together.
All told, between that fateful day in 2008 when Lehman Brothers fails and today, the Fed has printed and pumped more than $3.6 trillion dollars. That’s 91 times more than they printed and pumped to offset the economic shock of the 9/11 terrorist attacks.
Initially, of course, all this money feels good, like strong painkilling narcotics. We get cheap money and zero interest rates. We get more consumer spending. We get higher real estate prices and rising stock prices. All very endearing to some people. But in the long run, it’s the invisible side effects that are more enduring.
It wipes out the interest income of average American families and retirees who want to live off their savings. Or worse, it transforms them into speculators who wind up losing a portion of their principal.
It pushes investors to chase yield by taking big risks, and among those investors, only a small minority can be consistent winners.
Instead of paying out more in dividends or hiring more workers, it encourages big companies to buy back their own stock with borrowed cheap money.
And this helps explain why we’re now seeing a decline in capital investments — by those same corporations. In fact, it’s a key reason why, in the first quarter of 2016, we witnessed the first major plunge in capital expenditures since the Great Recession.
Right now all of this continues. It’s ongoing. But it raises an obvious question, a question that Fed Chairman Yellen is asked — and probably asks herself — all the time: “What will happen when the wonder drug stops flowing into the bloodstream of our economy?”
That is the first set-up — for Black Swans of the financial kind. But in the meantime, all this printed money also contributes to …
Black Swans of the Second Kind:
In the Social Realm
Let me restate the consequences of the Fed’s money printing: Zero interest rates. Virtually no safe yield opportunities for investors. A lot of big-stakes speculation. But only a small minority of winners. And fewer high-paying jobs. All this has driven the second major megatrend of our time: The concentration of wealth.
And let me add this: Today, the concentration of wealth is no longer just about the plight of the poor. Nor is it an issue limited to the nation’s middle class. It is also hindering higher-net-worth investors from growing their portfolios — by taking money away from dividends and from interest income.
In other words, we’re no longer talking just about the rich squeezing out the middle class. We’re also talking about American’s billionaires squeezing out America’s millionaires.
And as I’ll prove to you in just a moment, this trend has gotten a lot more extreme since the Fed began wildly printing money on September 15, 2008.
Of course, this wealth concentration in America didn’t begin in 2008. In fact, to get the full picture, I want to take you back nearly one hundred years, to the 1920s.
This chart shows you what proportion of the nation’s wealth is held by the super-rich. Not the top 1%. Not the top .1%. But the top .01%. In other words, the wealthiest one in every ten thousand American households.
Back in the 1920s, their share of the nation’s wealth was also rising — from 5% to 6%, to 8%, and then to a peak of 10% in 1929.
That was reversed when the great crash wiped out the fortunes of the super-rich, and the Great Depression drove their business enterprises into the gutter.
But jump ahead to 1978. That’s when the concentration of wealth in America reaches an all-time low. And that’s when it begins to rise again. which brings us to this critical point in history: 2008.
The year 2008 is not just when Lehman Brothers fails. It is also the year when the wealth concentration in America matches the peak levels of another important prior turning point long ago: the year 1929.
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The year 2008 is when inequality in America is close to what history tells us is a potential breaking point, and that’s precisely when the Great Recession begins.
But there’s a big difference between the Great Recession of our era and the Great Depression of the 1930s. Back then, the Great Depression reduced the wealth share of the super-rich. This time, it doesn’t. Instead, thanks primarily to the Fed’s money printing, the concentration of wealth surges to new, all-time highs, never before seen in this country.
The end result is the great social and cultural divide of America today.
Regardless of your own personal opinion of this megatrend, you should not be surprised if this social divide fuels powerful emotions — pride and shame … greed and envy … fear and anger. All fuel for Black Swan events of the social kind. And regardless of your political persuasion, you should also not be surprised when this concentration of wealth comes with the …
Black Swans of the Third Kind:
Political Division and Dysfunction
I know. You’re probably thinking this last topic is strictly for cocktail-hour chit-chat. Or maybe you’re wondering how I’m going to take this conversation beyond the typical rhetoric of politicians.
Here’s how: With this scientific study of political division and dysfunction in the United States. It’s based on an exhaustive study of voting patterns in the U.S. House of Representatives. And as you can see, it tends to move up and down, more or less in tandem with wealth concentration.
When the red line in this chart is low, it means that Republicans and Democrats in Congress vote mostly by the issues. In other words, they cross party lines and draft legislation together.
When the red line is high, it means that our elected officials usually disregard the substance of the issues. They vote strictly along party lines. They accomplish next to nothing. And they throw bricks at each other.
Most people called that Washington gridlock. But that was just up until 2008, when the political division and dysfunction in this country reached the same level as it did in 1929. Now it’s even more extreme, as you can see in this chart:
What comes out of this polarized environment?
You guessed it: Black Swan politicians (like Trump), surging out of the blue, gathering momentum, changing history and shifting America’s destiny.
So there you have it. The three extreme megatrends of our time, the three set-ups for Black Swans in the United States:
Black Swans of the first kind — in the financial realm.
Black Swans of the second kind — in the social realm.
Black Swans of the third kind — in the political realm.
Each of these is one side of the same single pyramid. Each is replicated, in far greater extremes in other giant economies of the world. And each is helping to drive even more flight capital to safe haven destinations. Next question:
What is most flight capital looking for?
It’s looking for quality, very high quality. Companies with the strongest balance sheets and longest, steadiest earnings history or the highest caliber, Class-A properties in choice locations.
It’s looking for safety — not just safety from financial risk, but also safety from social risk. Crime and organized crime. The decline of government services, hospitals, schools.
And it’s looking for safety from political risk. Election upsets, impeachments, coups, labor unrest.
Third, investors are almost invariably looking for one more very important thing: yield.
They used to find yield in bonds. But thanks to the massive money printing and zero interest rates, they can’t find much yield in bonds anymore. Investors also went for yield in dividend-paying stocks. But now they can’t find much good yield in stocks either.
So they’ve piled into commercial real estate. And that’s why, right at this very moment, commercial real estate prices in the United States have seen their biggest boom of all time. Even bigger than the boom of the mid-2000s.
Here’s my advice …
One. Don’t count your chickens before they’re hatched. In other words, invest and expand primarily in response to real current demand for your products and services — not on spec, not in response to someone’s forecast of future demand.
Two. Avoid the bubbles, or at least reduce your exposure.
Three. Invest in quality not quantity. A+ rated stocks. Class-A commercial property in choice locations.
Four. Prepare for Black Swans with cash. Plenty of cash in reserve to protect yourself from the unexpected.
Good luck and God bless!
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